Horizon CEO outlines fresh challenge for nuclear

29 June 2016

One of the nuclear industry's most experienced executives has postponed retirement from a 45-year-long career for a rare challenge - to deliver a privately backed new build project. As CEO of Horizon Nuclear Power - the UK subsidiary of Japan's Hitachi - Duncan Hawthorne aims to demonstrate that such a project is able not only to attract investors, but that it will be delivered on time and to budget.

Horizon plans to deploy the UK ABWR (Advanced Boiling Water Reactor) at two sites - Wylfa Newydd, which is on the Isle of Anglesey, and Oldbury-on-Severn, in South Gloucestershire.

Hawthorne at the NIA reception (Image: Horizon)

Hawthorne, who began his career as a craft apprentice in the Scottish electricity industry, was invited to head Horizon when he announced his retirement after 15 years at Canada's Bruce Power in April. Prior to this, he had spent three years as president of AmerGen LLC, and five years as executive director of British Energy. He served as chair of the World Association of Nuclear Operators (WANO) Atlanta Centre and until recently was president of WANO's governing board. He has been on Horizon's board of directors since 2013.

Business calling

In an interview with World Nuclear News, Hawthorne said he was persuaded to return to the UK from Canada, where he has citizenship, by the "business calling of trying to complete the set" in his career - a new build project.

"I didn't come here to fail. I didn't come here without strong belief that this was the right thing for the supply mix in the UK, that we have a good product that offers something that will fill a gap in the market," he said.

Hawthorne spoke to WNN on the side of the UK Nuclear Industry Association's summer reception, which was held in London on 23 June. Horizon sponsored the event.

He said: "British Energy were privatised in 1996 and just prior to that we'd talked a lot to the UK government about replacing nuclear with nuclear, that was in fact our slogan. But we didn't get any traction at that time, so I went off to North America with the intention of growing our business there and the expectation after two or three years was that I'd come back and try again to convince them on new build. And as it turned out we were very successful in North America, with acquisitions in the US and then Canada. And then of course British Energy got themselves into trouble in the UK. There was a separation and at that point, in 2002, I had the opportunity to come back and try and pick up the pieces in British Energy or stay behind in North America. I chose to stay, but I always had a feeling that there was a case for new build in the UK."

Shifting centre of gravity

WANO has been busy over the last five or six years with the "rapid growth of nuclear", particularly from Russian and Chinese state-funded projects, Hawthorne said, and with "making sure new entrants are actually able to manage the growth". But there is a "lack of a benchmark" for privately backed new nuclear projects, which is what Horizon wants to provide, he added.

Referring to the International Energy Agency's 'central scenario' - according to which global output from nuclear power plants is forecast to increase from 2478 TWh in 2013 to 4606 TWh by 2040 and expansion in China accounts for almost half of incremental nuclear generation - Hawthorne said the nuclear industry's "centre of gravity is moving towards the Pacific Rim". WANO is therefore considering "opening a fresh region in the Beijing area because that's where a lot of the activity is", he added.

"Our challenge is to win the commercial case here in the UK by building on time and on budget because that's where the real test is and [the industry] doesn't have a lot of good metrics on success with nuclear new build projects and we need to fix that," Hawthorne said, adding that Horizon wants the UK ABWR project to be its "flagship".

"We can talk about projects in Japan, but there was a different investor model to ours. This would be a really important test case for us. The Hitachi ABWR is not a first-of-a-kind design and the UK project is a destiny issue for the Japanese nuclear industry. They are looking to the return of the nuclear fleet in Japan, but in the meantime it's important that the technology continues to thrive and the UK is an important market for it," he said.

Regulatory benefits

A key part of its strategy is to have UK regulatory approval for the reactor design.

"There's no doubt that the UK regulatory regime is very highly valued by other regulators, so if your technology gets through that process, then you definitely have something that supports the product's marketability," Hawthorne said.

Even though Hitachi has been involved in the build of seven ABWRs in Japan to date, the Horizon plant will be the first time it has deployed the reactor design outside its home market, he noted. GE-Hitachi has deployed the ABWR in Taiwan.

"We're saying this is the eighth in a series, we do have experience, but people will say, but that was in your domestic market, what does that mean internationally. So there is a point to be proven here yet before we can really convince the broader market," he said.

Every regulatory regime has its own "nuances" and the UK's approach lends itself to a "proposal-disposal" type of relationship, he said.

"I don't think anyone had the expectation that the UK regulator would accept unchanged any foreign design, so the process is very clear; we go through various stages and the design is challenged. Obviously, we had to incorporate some post-Fukushima changes anyway, as did every vendor, but the hope was that we had a robust design and the changes wouldn't be major and to date we've confirmed that. We're feeling that the design has been vindicated by the approval process so far."

The ultimate positive outcome of the Generic Design Assessment (GDA) process would be the issuance of a Design Acceptance Confirmation (DAC) from the Office for Nuclear Regulation and a Statement of Design Acceptability (SoDA) from the Environment Agency. The UK ABWR began the GDA process in January 2014 and Horizon and the regulators have said it remains on target for completion at the end of 2017.

Technological first

The Horizon reactor will also be the first boiling water reactor in the UK, which has pressurized water reactors (PWRs) and Advanced Gas-Cooled Reactors (AGRs) in operation only. This means the UK regulator has had to "get up to speed" with certain aspects of BWR processes in its scrutiny of the UK ABWR. For example, the failure modes of a reactor with a boiler need to be understood against those of PWRs, where reactor steam is passed through the turbine, Hawthorne noted.

"With BWRs, like PWRs, it's the pressure vessel that tends to be the life-limiting component. It's not an easy fix. And with the AGRs it's the graphite core. Almost every design has some life-limiting feature, but it's probably fair to say that, if you look at what's happened to life extensions with PWRs, it's generally been the replacement of steam generators, or components like that. The BWR doesn't have those, so you're really thinking about the vessel. With a BWR, you can remove all the fuel and replace the vessel. It's more about the commercial viability than the technical feasibility. Whereas with AGRs it's a technical feasibility discussion."

Referring to EDF Energy's work to recover the operating margin of the AGRs it took over from British Energy, Hawthorne said: "There's no question that EDF have done a tremendous job in extending the life of the current fleet. I know this fleet as well as anyone and I wouldn't have bet anyone's money that these plants would last as long as they have." But those AGRs will be retired by 2030, he noted, and replacement capacity will be sorely needed before then.

In February, EDF Energy announced that the scheduled closure dates for its Heysham 1 and Hartlepool plants had been extended by five years to 2024, while those of Heysham 2 and Torness had been extended by seven years to 2030. The announcement followed extensions to the operating periods of EDF Energy's other AGR power plants.

Commercial structure

Horizon is not alone in its ambition to create a commercial structure that enables private capital to enter a UK new build project. NuGeneration (NuGen) - the UK joint venture between Japan's Toshiba and France's Engie - plans to build a nuclear power plant of up to 3.8 GWe gross capacity at Moorside, in West Cumbria using AP1000 nuclear reactor technology provided by Westinghouse Electric Company, a group company of Toshiba.

NuGen CEO Tom Samson, a friend of Hawthorne's and a fellow Scot, told WNN in May that his search for investment has included talks with Japanese and US export credit agencies.

Hawthorne said: "Not surprisingly, the characteristics of making the projects investible will be similar. Is it fair to say that NuGen and we are fishing in the same pool? Probably. But NuGen is probably looking somewhere else geographically than we are. The Toshiba-Westinghouse design takes them more into the US, while the Hitachi ABWR would take us more into Japan."

Unlike EDF Energy and its cooperation with China General Nuclear (CGN), Horizon "would be thinking about financial investors, rather than another vendor that is looking for an entre for their own technology", Hawthorne said.

Under a deal agreed last October, CGN will take a 33.5% stake in French state-owned EDF Energy's £18 billion ($28 billion) project to construct Hinkley Point C in Somerset. In addition, the two companies will develop projects to build new plants at Sizewell in Suffolk and Bradwell in Essex, the latter using Chinese reactor technology.

"There is a range of financing options and we're going to look at all of them, with the intention of offering a competitive project. The debt-equity structure and cost of capital are a direct function of the contract-for-difference. At the end of the day, there's no rite of passage for nuclear. There's an obvious climate change advantage, energy security and all the things you'll hear the Secretary of State talk about, but at the end of the day, the rate payer has to see a competitive price, and the debt-equity structure and the cost of capital can make a big difference," he said. "We would hope to have an idea of the financing structure by the end of this year," he added.

Horizon has not said publicly its estimated cost of the project, but Hawthorne said it expects its capital costs will be lower than those for Hinkley Point C "because it's not first-of-a-kind and the ABWR is a more compact and simpler technology" than the UK European Pressurized Reactor.

The importance of communication with the local community cannot be overstated, he said.

"You need to build reputation first and the plant second. You have to explain what kind of company you are, what's important to you, what your values are. We'll be on that site for 60 years and so people have to know what you stand for. Communication is key because sometimes you have to answer the same questions a number of times, not because they haven't heard the answer, but because they want the same answer, because that's reassuring.

"Hitachi’s values are about doing what we say we'll do, acting with integrity. Some people see those as soft issues, but I see them as core issues because without those things, how can you be trusted with the technology that no one can understand unless they're a nuclear physicist?"

Path to FID

Horizon's conversations with government are "lively, frequent and engaged", Hawthorne said, having just returned from a meeting with the Department of Energy and Climate Change. "The government have an interest in clarity and progress and for that reason we are meeting regularly with DECC. Our discussions are on the back of the Hinkley deal because that's the framework agreement and we're discussing what needs to be different and why. One of the obvious example of that is the fact we're a private sector company and how we look at the investibility of a project is different," he said.

"A direct lesson from the Hinkley project is if you look at the state aid challenge, that isn't a risk that a private sector company would take in nuclear new build. Simply stated, if the state aid thing becomes major, then you've lost your investment and there's no compensation for it. We have to think how we can be protected from that and in a reasonable way - because any protection a government would offer would in fact itself be state aid."

Hawthorne declined to discuss the details of Horizon's negotiations with government, but said, "The reality is there are a number of issues we need to resolve because our goal is to go out and explain to different capital pools why this is a good investment.

"Obviously we'll be able to say it's a good technology, it's tried and tested, we stand behind our vendor technology, but we also want to recognise that this is a multi-decades financial arrangement. Investors will only get their cash back once they've spent a lot of money towards it, so we have to prevent any uncertainty that this contract can stand the test of time in the short, medium and long term. And that takes a lot of work."

Different types of investors will come into the project at various stages, as is typically the case with any long-term capital project, he added.

"My experience in Canada showed that an operational nuclear plant is a very attractive investment for pension funds because it has long-term, stable and reliable returns to meet the long-term liability - paying people's pension. Pre-operation, your capital annually is not good for pension funds because they now have annual liabilities to fund with no income to match. So, it's a different type of investor with a different premium. Pension plans on the other hand are more likely to take a lower return because they are more interested in the certainty and stability. People who will take more risk, such as the build risk, are likely to be looking for a higher return. That means that in our debt-equity structure we have to strike a formula which allows the right type of investor to come in at the right time, but not at such a premium that it makes the product uncompetitive."

The project has to be competitive against a range of benchmarks, he said. "Hinkley is one benchmark, but so too are wind farms and gas plants. The government have expressed a view that they want to see this go ahead, but there is no blank cheque element to it. That's equally true between ourselves and Hinkley as between ourselves and offshore wind. So I'm working on the basis that our price has to be competitive against other options. That will be a necessary prerequisite to doing a deal."

The "deliverables" required to make a final investment decision include a DAC and SoDA, a site licence, a contract-for-different and a Development Consent Order (DCO). "They're not grey areas; we need to have those or we don't declare that we're able to make an FID," he said.

"We know how much work we have to do to fix the price of the build, to get a deal with government, the DCO piece, the design certification piece, and when all those come together we should be in a position to make the FID in 2019. It's more about other interim milestones and obviously we're now at stage 4 of the design certification so we'd like to believe we're in the 'fewer surprises' part of it. Now what I'm trying to do is make the same level of progress in the government discussions."

Peace and climate change

In a career spanning 45 years, Hawthorne has seen nuclear energy's role as an "incredibly powerful solution" to the world's energy deficit - as outlined by US President Eisenhower's Atoms for Peace speech of 1953 - and now, too, to climate change.

"There is no other high volume, high reliability emission-free technology," he said. "Of the eight billion people of the world, half of them still live in energy poverty. If they follow the same curve that we did, with wood and coal, then any savings we make in climate change will be entirely irrelevant. We in the more advanced cultures need to help those countries meet their energy deficit without creating climate change impact. If nuclear is not part of that, then I don't know of another option."